The famous investment bank Goldman Sachs (GS -1.41%) just did something that crypto investors need to know about. The bank’s action has significant implications for the future prices of Bitcoin (BTC -0.88%), Ethereum (ETH 0.88%), and perhaps also XRP (XRP -2.47%) in the future, assuming they repeat the move with another digital asset.
Here’s what Goldman Sachs did and why it matters.
These investments are getting popular among institutional investors
Per a filing with the Securities and Exchange Commission (SEC) in mid-February, Goldman Sachs recently bought large volumes of exchange-traded funds (ETFs) that hold Bitcoin and Ethereum. It now owns at least $1.5 billion of Bitcoin-based ETF shares, making it a major holding. This kind of purchasing activity doesn’t happen by accident, nor does it happen in a vacuum. Players like Goldman Sachs don’t purchase assets that aren’t fully within the mainstream. They aren’t about to take any chances on frontier assets that could be easily supplanted by others, or regulated out of existence.
In other words, Bitcoin and Ethereum now have yet another major marker of institutional adoption and acceptance in hand. Other cryptos that soon may have ETFs approved, like XRP, could easily be next on the shopping list for those same financial institutions. And for an industry that long operated in a legal gray area, and which fought against critics for years on end, there aren’t too many remaining endorsements of maturity that are left to attain.
Having big banks hold crypto ETFs is generally favorable for investors. Aside from being a mark of legitimacy for the underlying assets, those players don’t tend to sell their coins at the first sign of trouble. They’re biased toward long-term holding rather than impulsive trades, and toward accumulating more of assets that they think will be even more valuable in the future. For Bitcoin, given its supply dynamics, that could equate to significant sums of supply effectively being taken off the market by these institutional buyers.
For Ethereum, the picture is less clear. Goldman Sachs committed significantly less capital to it, likely due to its smaller size and the considerably higher risk associated with the chain. After all, to continue to gain in value, Bitcoin simply needs to continue becoming harder to mine over time, whereas Ethereum must continue to be an appealing place for crypto developers and investors to create and invest in new projects on its chain.
Don’t invest in these assets based solely on Goldman Sachs
As bullish as it is for a major investment bank to be buying ETFs holding Bitcoin and Ethereum, don’t go running to buy those coins merely as a result of someone else doing it at scale. Borrowing conviction from another investor seldom works. You need your own investment theses for these assets if you’re going to have any hope of holding them for the years it’ll take to use them as instruments of wealth-building.
Instead, consider Goldman Sachs’ move as a sign that there aren’t too many remaining catalysts related to institutional acceptance of these coins. That means if your investment thesis hinges solely on the adoption of these assets as the main driver of higher prices, you’ll need to adapt your thinking to account for a world in which there aren’t many major new users left to be onboarded. On the other hand, that could mean there’s a bigger opportunity for generating value from the actual use of these coins or for their financial utility, rather than their use as speculative assets alone.
One final note: Someday, Goldman Sachs or other investment banks will sell some of their ETFs or their coins. There will be headlines written about it. Don’t get scared out of your positions simply because institutional holders trimmed theirs. Focus on the long term and the drivers of higher prices. The reasons why those big banks make certain moves with their investments are often more important than the moves themselves. The right play could very well be different for you than it is for them.
Alex Carchidi has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin, Ethereum, Goldman Sachs Group, and XRP. The Motley Fool has a disclosure policy.
